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Operational matrix deteriorates…
Varun Shipping Co (Varun Shipping) reported disappointing results in
Q2FY11 despite a QoQ rise in topline. The main disappointing factor and
matter of concern was the sharp decline in EBITDA margin to just 3.1%
and EBITDA of Rs 4.8 crore. Interest (Rs 51.6 crore) and depreciation (Rs
46.4 crore) resulted in a net loss from operations of Rs 88.5 crore in
Q2FY11. The operational performance of Varun Shipping is likely to be
under pressure for another couple of years as freight rates continue to
remain subdued. The sale and lease back arrangement would continue
to put a strain on the EBITDA margin and the performance could
deteriorate further in absence of extraordinary gains from sale of assets.
Disappointing Q2FY11 performance
Varun Shipping reported a QoQ rise in topline of 17% at Rs 154.1 crore
in Q2FY11 as against Rs 132.2 crore in Q1FY11. The rise in revenue can
be attributed to a drop in dry docking of vessels QoQ. The company
reported a negligible EBITDA margin at 3.1% as against 12.8% in
Q1FY11. The drop in EBITDA margin can be attributed to an increase in
charter hire expenses on account of a sale and lease back arrangement.
The company reported a net profit of Rs 0.6 crore in Q2FY11, which
included a gain of Rs 89.07 crore on sale of assets. Excluding this, the
operating loss would have been Rs 88.5 crore.
Valuation
Varun Shipping operates a diversified fleet and has a dominating
presence in the Indian LPG space combined with strong management
capabilities. However, the steep correction in freight rates and high
leverage has had a cascading effect on the company’s operational
performance. At the CMP of Rs 42, the stock is trading at 1.0x FY12E book
value of Rs 43. We have valued the stock on a P/BV basis to arrive at a
price target of Rs 34. We have maintained our SELL rating on the stock.
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